Modernization is the only way ahead

Interview with Moscow Oil Refinery CEO Arkady Yegizarian

Gazprom Magazine

The limits of capacity

— Arkady Mamikonovich, shall we begin with the production results?

— Although our plans were tough and ambitious, the results we achieved met our expectations. We expect a total of approximately 10.6 million tons of oil refined in 2012, which is within the bounds of the targets set in the business plan, as is the production of light oil products.

At present, our main tasks consist in upgrading, reconstructing, and creating new production facilities. And we are exceeding our investment plans by about 10 percent.

In 2012, we repaired the large process ring. As a whole, about seventy types of jobs have been performed under programs for the reconstruction and replacement of obsolete equipment and improving production efficiency. Among other things, this repair will allow us to phase out 40 to 60 octane commercial straight-run gasoline, which is produced by the primary oil refining unit, in 2013. We will channel the gasoline for either reforming or isomerization. We completed the repairs faster than we expected to.

— A number of media outlets were throwing a fit over those repairs of yours.

— Yes. We do maintenance work every year. But the media started speculating on the matter only during the last two years. There was never any deficit of motor fuels, and there isn’t one now. Our enterprise has a very responsible approach to such issues. Certain traders take advantage of unconfirmed rumors to raise prices. For some reason, there is never any uproar over the expected drop in prices when the maintenance work is over. Such things simply distract us from our work.

Nevertheless, we will launch several reconstructed and completely new units in 2013. We expect during the first quarter to complete construction and installation work and commissioning of several units, including an isomerization plant (which is the largest investment project), a catalytic cracking gasoline hydrotreatment plant, a nitrogen production plant, a diesel fuel hydrotreatment plant, and a short-cycle adsorption unit. We will also begin preparations for the combined oil refining plant site. That site will replace a number of old production facilities that consume lots of fuel. This one is a new, super-modern facility. It will have hydrotreatment, reforming, a gas fractionation plant, and atmospheric vacuum distillation.

— How will that affect your performance indicators in 2013?

— We have nearly reached the design capacity, and do not plan to reduce the volume of our output.

Bitumen

— How is the process of upgrading bitumen production going?

— In 2012, we completed the first stage of reconstructing our bitumen production facility, which, in particular, made it possible to achieve a substantial ecological effect. The bitumen was previously loaded in the open air, and now that is done inside a sealed chamber. This reduces vapors emitted into the atmosphere by 90 percent. Our employees and the residents of neighboring buildings have already felt the changes from this. In 2013 we will disassemble the small bitumen plant.

We are also planning to launch the production of polymer modified bitumen cements and bitumen emulsions. Using polymer modified bitumen cement increases substantially the duration of intervals between maintenance on the pavement of motor roads. Gazprom Neft is developing this business direction in partnership with Total. Total is a world leader in the oil industry. Work is underway for the creation of a joint venture for the production of polymer modified bitumen cements.

— What is Total’s role in that?

— We plan to make our investments in equal proportions, just as we will distribute our profits. Total guarantees the supply of components, while Gazprom Neft guarantees the supply of raw materials and initial bitumen. The production process will utilize Styrelf technology. By the way, bitumen produced by the Moscow Oil Refinery has undergone preliminary tests at our scientific research center, as well as at certain European enterprises belonging to our French partner, and it got very good reviews.

— How much of it are you planning to produce?

— The unit’s capacity is 60,000 tons per year. Demand is just beginning to grow, but it’s already clear that Moscow can absorb that much of the product by itself. Of course, we’ll see seasonal variations in production. You see, it’s during the winter that all the maintenance work is done. It will take some time for the production facilities to get up to full speed.

— Is this production facility designed to serve Moscow and the surrounding metropolitan area?

— It’s not for them alone. We expect that our product will be in demand for construction and reconstruction of roads both within Moscow and on federal freeways.

— Do you have any agreements in place?

— Not yet, but we have an understanding of the market trends. In particular, we understand that the product will be in demand. You see, modified bitumen provides substantial savings for the road construction customer. We are feeling support from the Moscow city government.

— What share of the Moscow region bitumen market will switch over to modified bitumen?

— It’s difficult to judge at present. But it is my earnest conviction that in the offing, modified bitumen will come to occupy a market segment comparable with the best levels internationally. That means 10 to 15 percent, like in Europe and the United States. There are lots of cars, traffic is thick, the pavement is being constantly repaired, and that means colossal burdens on the government budget.

— But the demand for bitumen will drop when the interval between regular maintenance increases.

— No. In Russia, many new roads need to be built. As long as we are investing enormous funds in constant repairs, there is not enough left over for development. And introducing new materials is a project that will go on for years.

— Will the cost of construction go way up?

— Bitumen comprises a small portion of the cost of roads, about 5 percent. Polymer modified bitumen cement costs more than ordinary bitumen, but it’s a miniscule change in the cost of building a kilometer of road.

— When do you plan to sign the deal to establish a joint venture with Total?

— During the first quarter of 2013. We are already ordering equipment.

The depth of refining

— What is the share of your products on the Moscow market?

— It’s relatively stable, about 35 to 40 percent. We expect that our market share will grow as our oil refining depth increases and the quality of our products improves.

— What is the refining depth now?

— 71 to 72 percent. The next stage in development of the refinery, which is set to start in 2015, will be increasing the refining depth. We are planning to create a vacuum gasoil hydrocracking plant and a flexicoking plant. At the end of the investment cycle, we will reach a depth of 94 percent.

— What is the international standard?

— The most advanced refineries in the world have a refining depth of about 95 percent.

— When will you stop producing residual fuel oil?

— In 2019-2020.

— How will the proportions of the various types of gasoline change?

— The relative amount of 95 octane gasoline will go up significantly.

Euro 5

— How is the motor fuel production going as a whole?

— Beginning in the second quarter of 2013, our enterprise will convert to the production of environmental grade 5 fuels, which will put us significantly ahead of the timetable set out in the technical regulations.

— How far ahead will you be?

— By about two and a half years. Let me remind you that in 2010, we produced grade 3 products, and by now we have converted entirely to class 4 fuels.

— How will that affect the cost of producing the fuel?

— On one hand, the cost of production is increasing, but at the same time we are improving our energy efficiency and optimizing many processes. That’s why we expect that the increased expenses for making the product will be compensated for by a reduction in consumption of energy resources.

— But most of the cars in our country are of old cars. Why convert to Euro 5 if most engines are not designed for this fuel and will not be able to achieve a substantial ecological effect?

— This is a subject that gets discussed a lot. I can say that Moscow’s automobile population is newer than the average in Russia, and converting to more environmentally friendly fuels makes a lot of sense here. The quality of fuel is very significant because of the intensity of traffic in Moscow. In Russia as a whole, you are right that there are a lot of old cars. But they are gradually being replaced by new ones. You can’t stop upgrading just because the fuel isn’t in great demand today. Furthermore, more environmentally friendly gasoline and diesel fuel produce fewer emissions than grades 2 and 3 fuel even for less efficient engines, albeit to a less appreciable extent. And the air that we breathe becomes cleaner from that. Of course, improvements are less apparent when converting to the higher environmental grades, and those improvements are more difficult to achieve. For example, the difference between grade 3 diesel and grade 4 diesel is huge: 350 parts per million of sulfur and 50 parts per million of sulfur. But the difference between grade 4 and grade 5 is not so big: 50 parts per million of sulfur and 10 parts per million of sulfur. In the first case, you’re reducing sulfur content by 300 parts per million, and in the second you’re reducing it by only 40 parts per million. Compared to the previous changes, the effect is a paltry one. But we need to keep going in this direction. It’s also very important that the changes are irreversible. Otherwise, if some producers would invest in new technology, upgrading equipment, and training personnel, while others would wait out to see if the changes stick, it could happen that nothing would change.

— When will you convert to grade 6?

— For now, I don’t see any serious preconditions for that. But if the government demands it, we’ll do it. However, it won’t bring about a tangible ecological effect. The quality of the vehicles on the streets will play a huge role in the transition to Euro 6. We first need to all convert to grade 5.